Why are gas prices so high?

This has been a question nagging at me for some time. Last week, I woke up to a CBC world report story on this very subject. I wiped the sleep from my eyes, rolled over to get a better angle to listen to the radio, and waited to be enlightened.When the report was over, I was left just as confused as I was before. Prices at the pumps are breaking new barriers, it seems, every two weeks. We get used to seeing $1.20 per litre, and then I see we've risen above $1.30. I read as much as I can on line and in national dead-tree publications to try and understand how this can be. And still, I get no satisfcation.Is it market speculation? Are we running out of crude oil? Is OPEC pulling back on production? Are increased taxes and royalties being charged by countries around the world driving oil companies to increase the price of a barrel of oil? Or, are the oil companies just ratcheting up the prices to see how far they can push us until we grab torches and pitchforks and head to the local gas bar?And then in last week's Financial Post I read a story generated by the Reuters news agency that pulled together some interesting facts. Reporter Jane Merriman explains that total world oil output fell in 2007 for the first time in five years. Quoting Tony Hayward, chief executive of BP Plc, it appears that a variety of global factors led to the overall decline in production. Hayward notes, however, that this is less about the total amount of crude under the ground than it is about the various hurdles to getting it out and refined."We are not running out of hydrocarbons," Hayward noted, "but bringing them into production is a different matter. When it comes to producing more oil, the problems are above ground not below ground, and human not geological."The story notes that contributing above-ground, human problems include increased taxes and royalties by oil-producing nations on the private companies that develop the oil reserves, and decreases in production among OPEC nations and other non-OPEC countries like Venezuela and Russia, which is the second-largest producer of crude. The result is that there are hundreds of thousands of fewer barrels of oil being produced now from just two years ago.When you look at these trends, obviously there is little motivation for oil producing countries to ratchet up production. They are making more money selling less product, which appears to be a classic winning strategy in the old supply and demand equation. The only counterveiling force is, quite frankly, the increasingly frantic consumers of petroleum products who are putting pressure on their governments to do something to ease gasoline prices. Will oil producing nations respond?Well, at least one has. Saudi Arabia has agreed to increase production to ease the energy crunch, and is asking that oil producing and consuming nations attend an international summit to figure out what should happen with oil prices. And now it gets really interesting.Will market speculators respond if the supply increases, or will greed eclipse natural market forces? I'm not convinced that the decisions oil-producing nations are making is not partially based on concerns about exhausting supply. There seems to be a sense that oil producers like what's going on, and they're managing their business to ensure the good stuff lasts a good long time.I'm leaving the car in the garage today - it's my only hedge option.*****In other energy related news, colleague Mary Agnes Welch has a solid story in today's FP confirming that Manitoba Hydro will charge its residential customers more if they use more electricity. Although some homeowners would be surprised to know this isn't already happening, Hydro is only now getting in on the "inverted rate" model to curb domestic consumption. You get one rate for the first 900 kw/hs and then the rate goes up once you've crossed that threshold.Among the alarming facts in the story, Saskatchewan's annual domestic consumption goes down about three per cent every year on the strength of inverted rate pricing. In Manitoba, where we have award-winning demand-side management programs, our consumption goes up about seven per cent annually.Nuff said.-30-

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